5 Warning Signs Your Stock's a Fad

Watch out for these characteristics of fad stocks, which will eventually fall as quickly as they rose.

Your teenage daughter suddenly wants to wear cowboy boots, even though you live in the city. Your son won't tie his shoes. The woman next store dyes her hair pink. And every now and then, a stock surges quickly higher and then disappoints investors who jumped on board for the ride up with an even more dramatic crash.

Fads come and go, and so to "fad stocks." To avoid getting stuck in one on the way back down, you need to understand what a fad stock is and the warning signs to watch out for.

History of Fad Stocks

Fad stocks are nothing new, and you might be familiar with some examples from the past. Many of the stocks still exist today, though likely not in their fad form. Here are a few from over the years:

Snapple: In the 1990s, this iced tea and noncarbonated beverage company was a hot commodity. Howard Stern and Wendy the Snapple Lady popularized the company that was "made from the best stuff on earth." The stock was hot, but management always thought it was worth more than the market was willing to pay for it. Investors agreed and bid up the stock with reckless abandon.

Eventually, in 1994, Quaker Oats, (which was subsequently purchased by Pepsico ( PEP)), paid $1.7 billion for Snapple. Just over two years later, Snapple was dumped to Triarc for $300 million. Now it is part of Dr Pepper Snapple ( DPS).

Heelys ( HLYS): This company, known for its roller sneakers, came public to great fanfare at the end of 2006 at $21 per share. It opened trading that day at $30.30, rose about another 20% in the subsequent few weeks in 2007 and then began a precipitous fall. The stock now sells for around $1.64. After earning 95 cents per share in 2007, the company will earn maybe a penny per share in 2008.